Economists Corner: East coast wholesale gas price drop

By Ryan Esplin, Economist, AEMC
13 February 2020

Despite increasing domestic demand, east coast wholesale gas prices have fallen by around 35% over the past year from around $10/GJ at the beginning of 2019 to $6.30/GJ in January this year, as shown in Figure 1.

 

Figure 1: Wholesale gas prices

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Source: STTM and DWGM prices from AEMO Gas Bulletin Board

 

This decline follows a significant fall in the global LNG price throughout 2019. Increased LNG production in the United States and Australia and a mild winter in the northern hemisphere saw the ACCC’s estimated netback price fall from a high of $13/GJ in late 2018 to less than $6/GJ in February 2020 with forward prices going as low as $3.81/GJ for April 2020. Prices are expected to remain subdued until at least the second half of 2021 and may fall further in the short-term due to the impact of Chinese companies backing out of gas contracts as a result of the coronavirus .

The fall in wholesale gas prices is particularly relevant for the two million residential customers in Victoria. Figure 2 shows Victorian wholesale prices against historic and forward LNG netback prices. Victorian prices have not been this low on a sustained basis since early 2016.

 

Figure 2: ACCC LNG netback price and Victorian wholesale gas prices

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Source: ACCC netback price series and DWGM prices from AEMO Gas Bulletin Board

 

If the fall in wholesale prices persists, the reduction should flow through to retail prices. This should bring relief to households and businesses with the wholesale price making up around 40% of a residential gas bill in Victoria.

Another potential benefit is lower electricity prices. One of the key drivers of electricity prices in the east-coast National Electricity Market (NEM) are gas prices. The recent fall in gas prices likely contributed to the 25% fall in Cal 21 Victorian contract prices since October, 2019 from around $80/MWh to $60/MWh. This may provide some relief in the near term as an influx of new renewable generation drives down wholesale electricity prices further over the next few years.

To benefit from the fall in prices, customers should regularly compare retail offers in their area. Residential and small business customers can compare gas offers at Victoria Energy Compare for Victorian customers and Energy Made Easy for customers in South Australia, New South Wales and South-East Queensland.

 

Economists Corner
This information is prepared by the AEMC’s Strategy and Economics team. It does not necessarily reflect the views of the Commission